Microsoft Corporation Wants A Piece of Amazon’s $50 Billion Business

Amazon used to dominate the cloud, and while still being large, Microsoft is proving to be quite a threat to Amazon's $50 billion business.

Amazon.com(NASDAQ:AMZN) and Microsoft(NASDAQ:MSFT) are Nos. 1 and 2, respectively, in the fast-growing business known as cloud infrastructure services. Until recently, Amazon has been the go-to cloud services provider, and as a result several top research firms like Evercore have valued the business at $50 billion. However, with Microsoft fast on its heels, should Amazon be worried?

Cloud is all around usMany consumers still don't quite get the cloud. But, with 50%-plus annual growth and $13.5 billion spent over the last year in the industry, the cloud is all around us and quickly becoming a normal part of society.

When a consumer saves or uploads a document on Office 365, the cloud is at work. Whenever someone watches a show or movie on Netflix, Amazon Web Services, or AWS, allow for thousands of servers to deploy the content while simultaneously performing the same function for terabytes of storage, allowing consumers to enjoy streaming from anywhere in the world.

Essentially, the cloud is behind the scenes working for consumers with infrastructure as a service, or IaaS, from websites, storage, memory, and streaming, and also to optimize, deliver, and create mobile application platforms -- platform as a service, or PaaS.

The scope of laaS and PaaS are broad, and as the old-fashioned pen and paper become obsolete in the majority of big industries, and as digital platforms grow more advanced, consumers can rest assured that the cloud is here to stay for a long time.

Amazon's fast-growing valuable cloudWith that said, it should come as no surprise that becoming a leader in providing cloud services is a top priority for most technology companies. Amazon was a pioneer of this business, and to this day owns nearly one-third of all revenue created through laaS and PaaS.

According to Synergy Research, Amazon exceeded $1 billion in revenue from its AWS cloud segment in the first quarter of this year. With the industry growing 50% annually, Amazon now has a revenue run rate of more than $4 billion, or roughly 5% of total sales.

Yet despite AWS' small size relative to Amazon's total business, Wall Street analysts value it at approximately $50 billion.

Don't bet on Amazon just yetClearly, such a valuation is based more on what AWS could become than its standing today, along with the assumption that its presence within the cloud industry is so dominant that it will be tough to challenge. But the last two quarters have seen Microsoft making a hard push to challenge Amazon's dominance. Moreover, by looking at the numbers, investors shouldn't proclaim Amazon the victor just yet, nor should consumers believe AWS' services are superior to those from Microsoft.

In the first quarter, it is estimated that AWS revenue grew 67% year over year. Meanwhile, Microsoft solidified itself as the No. 2 player in the industry with a total market share of 8% and year-over-year revenue growth of 154%. Microsoft achieved this feat with aggressive pricing and strong performance in certain segments like privacy and identity services.

Identity services fit within Microsoft's popular Azure Active Directory, or AD, service, which has 300 million accounts. Mark Russinovich, a technical fellow in Microsoft's cloud and enterprise business, recently said that AD has 13 billion authentication requests per week.

Due to strong demand for storage and other cloud services, Microsoft has sparked interest in its other laaS and PaaS offerings. The company saw sales growth in excess of 100% during the second quarter for both its Azure and Office 365 platforms despite cutting prices from 27% to 65% on various popular services on the Azure platform.

In response, Amazon reduced prices for competing services by 36% to 65%, but it's estimated AWS' revenue grew just 38% year over year during the second quarter. That marked the lowest AWS revenue growth in years, possibly ever, as Amazon was unable to turn a 90% increase in usage into revenue following its discounts. The key takeaway: Microsoft's overall growth in the cloud makes it a close competitor for Amazon.

Foolish thoughtsAll things considered, Amazon retains a leading presence in the cloud services business, and will likely remain relevant as the sector grows much larger. Yet while consumers and businesses previously used Amazon for the great majority of their cloud needs, Microsoft is closing that gap and building an enormous presence of users that is undoubtedly affecting Amazon's $50 billion business. Hence, Microsoft is quickly becoming the new AWS, a trend that might very well be sustainable.

Author

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories. Follow @bnichols9883